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Salvage Shrinking College Savings

Since the financial crisis began, parents may have seen big college savings losses. What should they consider doing now?

Some parents with 529 college savings plans may not want to make contributions in 2009 due to fears about the economy. BusinessWeek reports grim data from investment research firm Morningstar: 529 fund offerings that had 80 percent or more of assets invested in equities were down an average of 38.4 percent in the one-year period ending March 31.* No wonder parents feel queasy about doling out more money to the funds.

Financial writer John Gilliam asked Wasif Latif, USAA’s vice president of equity investments, about the college-funding challenge USAA members face.

GILLIAM: What do you say to those who plan to skip making a 529 contribution this year?

LATIF: If you’re unemployed and can’t pay bills, you do what you have to do. But the percentage of members in that situation is small. To the larger group choosing not to contribute because of poor 2008 returns or fears about the economy, I say that decision may be costly and have a detrimental effect on their ability to fund a child’s education.

GILLIAM: Is skipping one year really that big of a deal?

LATIF: Yes. Successfully funding college through a systematic investing program is based on the most tried and true investment principles.
• No. 1: Start early to take advantage of the potential long-term performance and diversification benefits of stocks and bonds.
• No. 2: Contribute consistently to take advantage of dollar cost averaging, which means you buy more when markets are down, effectively lowering your average cost.
• No. 3: Make small contributions a habit, as re-starting is tough. These principles hold true for all types of systematic investing, including retirement.

GILLIAM: But when people look at losses of 30 to 40 percent in 2008, it’s hard not to get discouraged.

LATIF: Naturally. 2008 was a terrible year. But in any systematic investing program, you can’t just contribute when the markets are up, or you give up the benefits of the long-term approach.

Monitoring a 529’s asset allocation so that it’s more conservative as college approaches should help protect against dramatic losses. Our USAA 529 Plan starts off very aggressively, with a high allocation to stocks when the child is young, and gets more conservative as college nears. So the biggest losses would have been in accounts for very young children with time on their side. In these cases, you want to be buying when stocks are way down. It may not feel good now, but if market history is any guide, it potentially will later.

GILLIAM: Has USAA made any significant changes to its 529 plan?

LATIF: We’ve added new asset classes, including emerging markets and precious metals and minerals equities, and we’ve increased exposure to international investments — moves which allow us to apply more of our asset allocation expertise. For students in college, we currently offer a portfolio which has only 10 percent of its assets in USAA stock funds and the rest in USAA bond and money market funds. But we anticipate introducing a new portfolio soon that has a USAA money market fund as its underlying fund so that it seeks to preserve capital. ■

*BusinessWeek, April 30, 2009

Consider the investment objectives, risks, charges and expenses of the USAA College Savings Plan (Plan) carefully before investing. Call 1-800-292-8825 to request a Plan Description and Participation Agreement containing this and other information about the plan. If you or the beneficiary are not residents of the State of Nevada, consider before investing whether your or the beneficiary’s home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through this Plan. Please consult your tax advisor.

An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.



For 2009 only, the IRS is allowing 529 college savings plan holders to switch the investment options on their existing contributions twice instead of just once per year.

Call USAA at (800) 583-8293 for a free portfolio review. Your investment choices now could make a difference for your child’s future — and your own. For more, visit USAA.COM (search: 529).
USAA, a diversified financial services group of companies, is among the leading providers of financial planning, insurance, investments, and banking products to members of the U.S. military and their families. For the past three years, BusinessWeek magazine ranked USAA among the top two “Customer Service Champs,” highlighting our legendary commitment of providing highly competitive financial products for approximately 7 million members. For more information about USAA, or to learn more about membership, visit usaa.com.

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